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Friday, January 30, 2015

Investors in the industrial/machinery sector have quite a lot to mull
over these days. The steep drop in energy prices has undermined the
growth plans of many companies, while the persistently sluggish recovery
in construction has taken its own toll. Add in concerns about Europe
and China and it's not a terribly comforting picture.

In the case of Oshkosh (NYSE:OSK)
it's arguably worse from an uncertainty standpoint. Oshkosh is logging
good orders in access, but utilization rates aren't great and the ABI
hasn't broken out. Add in the potentially enormous, but very uncertain,
award for the JLTV vehicle contract and you can generate a wide spread
between the bull and bear scenarios. I'm not a big fan of
win-big/lose-big investment scenarios unless I've very confident that
the conditions support the "win-big" side, and so it is hard for me to
get enough comfort with Oshkosh to put my own money into these shares.

Investors who want to find high-quality med-tech names trading at
meaningful discounts are going to have to hunt around, as there aren't a
lot of obvious bargains on the high-quality shelves. Stryker (NYSE:SYK)
remains a well-run and diversified med-tech player, and one with the
flexibility to pursue value-creating M&A, but it's not trading at a
valuation that would suggest that its prospects are overlooked by the
market. I wouldn't sell the shares if I owned them, and there are worse
things than buying a very good company at a fair price, but I can't call
it a must-buy at this price.

A good general rule of thumb says that investors should look to buy
high-quality companies when investor enthusiasm has waned, and it does
seem as though sentiment has cooled on Parker-Hannifin (NYSE:PH) in recent months. It's not exactly a wash-out yet, as the shares are still up a bit over the past year and have outperformed Eaton (NYSE:ETN) and Rockwell (NYSE:ROK) while lagging Honeywell (NYSE:HON) and 3M (NYSE:MMM).

Parker-Hannifin's
exposure to an improving aerospace sector is a good thing, as is the
company's leverage to trucks and cars and a solid track record of
operating performance. With sizable exposure to Europe, though, forex
has become a concern as has Parker's exposure to PMI-sensitive
diversified industrial markets. I do think these shares are now at a
level where long-term investors ought to be interested, but
Parker-Hannifin's sensitivity to industrial growth is a risk if North
America slows and/or Europe slips back toward contraction.

Thursday, January 29, 2015

I bought Roche (OTCQX:RHHBY)
years ago because I thought that the Street was overly concerned about
near-term threats to the company's oncology portfolio and was
overlooking the long-term potential of a true giant in oncology and an
underrated player in global pharmaceuticals and diagnostics. I really
can't complain about the performance since my early 2011 purchase, as
Roche's 90%-plus gain has outstripped Novartis (NYSE:NVS), Johnson & Johnson (NYSE:JNJ), Glaxo (NYSE:GSK), Pfizer (NYSE:PFE) and Novartis . Of the stocks I was looking at at that time (when I decided to sell Johnson & Johnson), only Amgen (NASDAQ:AMGN) and Bristol-Myers (NYSE:BMY) have done better.

Since
then, though, Roche has underwhelmed me with its R&D productivity.
The company has done fine with its oncology drug development, but its
repeated failures outside of oncology have left the company with a gap
in its pipeline and vulnerability to potential price competition in
immuno-oncology. Absent a more comprehensive re-think of its approach to
R&D, it may be time to think about taking profits in this Swiss
drug and diagnostics giant.

Six months ago, things were looking pretty good for Dover (NYSE:DOV).
The company was looking to leverage its supply chain for further margin
expansion, while expecting growth from the retail adoption of "close
the case" refrigeration equipment, further expansion of the downstream
chemical and plastic capacity, and strong drilling growth across North
American basins.

I thought Dover was a little too expensive then,
but I had no idea what was in store for the company. Six months ago, oil
was above $100, and the nosedive below $50 has radically altered the
drilling plans of energy companies, leading to a major revision in
Dover's growth expectations and the prospect of at least a couple of
"lost years" in the growth/self-improvement story.

I don't believe
Dover has suddenly become a bad company, but the company's heavy
weighting toward energy for a significant percentage of its earnings
leaves it vulnerable to feast-or-famine swings, and I don't think the
other businesses are strong enough to compensate. Although I think it is
possible to make a value call here, it's hard to imagine investors
warming up to Dover so long as rig counts and capital budgets are still
heading down.

Having recently written that I'd be willing to sell 3M (NYSE:MMM) in the face of its take-no-prisoners valuation if I could find a good enough replacement idea, Honeywell (NYSE:HON)
seemed like a logical place to look. I'm happy with what I found, as
Honeywell offers broad multi-industry exposure but has built itself with
a "be the best or be gone" mentality. Honeywell is also pursuing some
fairly ambitious (but reasonable) margin and ROIC improvement targets
that could have it near the top of the list of its peers in three to
five years' time.

Now for the catch - investors aren't exactly
getting a fallen angel or hidden gem here. Honeywell's quality and
self-improvement plans are not secrets and even with some concerns about
the company's exposure to falling oil prices, the shares aren't dirt
cheap. Management could add value by a faster/better margin acceleration
and/or by leveraging the balance sheet and acquiring more businesses. I
haven't decided if I'm going to swap 3M for Honeywell, but Honeywell
isn't a bad stock to consider in the industrials/conglomerate space.

The best antidote to an expensive stock is strong financial performance, and 3M (NYSE:MMM)
continues to deliver that for its shareholders. The reporting season
isn't over, but 3M's organic revenue and operating income growth will
probably have it near the top of the list in the multi-industry sector
and the company's performance makes management's long-term targets of
4%-6% annual organic revenue growth, double-digit EPS growth, and 20%
ROIC seem credible.

While I'm a shareholder, I'm still concerned
about valuation. I accept that high-quality companies will (and arguably
should) trade at premiums and I look at my 3M shares as a long-term
holding, but valuation always matters. I'm reluctant to sell shares in a
company I really like, but it's hard for me to argue that a reader
should buy 3M instead of Honeywell (NYSE:HON), Dover (NYSE:DOV), or other another high-quality industrial.

It's not hard to understand why investors could be bearish (or at least ambivalent) about Accuray (NASDAQ:ARAY). This company is well behind Varian (NYSE:VAR)
in terms of market share and Varian has the financial wherewithal to
spend on R&D in one quarter what Accuray spends in a year. What's
more, there are still questions about whether Accuray can/will get an
important product enhancement to market on time and just how much
benefit the company can expect to see in terms of orders, revenues, and
profits.

Although I believe I understand the bear arguments, I'm
not bearish on these shares and I still see reason to own them. Yes,
Accuray has a steep hill to climb to get radiation oncologists to view
it, and its systems, as a true peer to Varian and Elekta (OTCPK:EKTAY).
But, I believe there are advantages to Accuray's technology and
products and I believe that management has made meaningful strides in
improving its product quality and its marketing approach. All of that
being said, orders have to materialize for Accuray's potential to be
anything more than just words and figures on paper.

Wednesday, January 28, 2015

Bank stock performance has been pretty "meh" of late and Wilshire Bancorp (NASDAQ:WIBC) is no exception. That Wilshire has done better than the S&P Regional Banking ETF (NYSEARCA:KRE) and other California-based banks like BBCN Bancorp (NASDAQ:BBCN) and CVB Financial (NASDAQ:CVBF) since my last article is cold comfort, as the shares are down slightly over that period.

Wilshire
has been making some progress in important areas like reducing core
operating expenses and diversifying the loan book, but modest sequential
revenue growth and greater pressure on interest margins is perhaps the
bigger takeaway today. I do believe that Wilshire Bancorp remains
fundamentally undervalued, but small bank stocks can take time (and a
lot of patience) to deliver their value.

As Top Ideas go, my September 2013 call on Plum Creek Timber (NYSE:PCL) has been a dog. The stock is up from that initial report, but investors would have much better with Weyerhaeuser (NYSE:WY) or Potlatch (NASDAQ:PCH),
let alone any number of stocks outside of the timber space. If there's a
silver lining, it's that this dog has fewer fleas now, as the shares
have rebounded more than 10% off the October 2014 low and continue to
offer a decent yield.

This coming year is not likely to be
dramatically better. Plum Creek's management is looking for growth in
housing starts, but new household formation remains worryingly low and
new opportunities like wood fuel pellets are not going to create major
dislocations in the demand for pulpwood. On a more positive note, the
public market valuations of companies like Plum Creek are starting to
better reflect the value of timberlands indicated by actual transactions
and management has expressed a willingness to sell non-core timberland
at the higher private values and use the funds to repurchase shares
below net asset value.

This was not the start to 2015 that I was hoping for from First Cash Financial (NASDAQ:FCFS).
Although foreign currency moves are out of the company's control and
same-store sales continue to improve in both the U.S. and Mexico, I
don't expect the market to be at all pleased with the probability that
reported revenue growth will stall in 2015 and that reported earnings
per share will decline.

The outlook is not so bleak on a long-term
free cash flow basis and First Cash still has multiple avenues of
profitable growth to pursue. A roll-up strategy in the U.S. can still
generate good margins and cash flow while the Mexican stores remain an
underpenetrated play on Mexican consumers. Last and not least is the
eventual/possible expansion into additional Latin American markets.

Double-digit
EBTIDA growth could mollify investors, but I'm expecting 2015 to be a
more challenging year for First Cash. Given that the stock is not hugely
undervalued, I would say it looks more like a hold than a buy today.

Tuesday, January 27, 2015

I liked First Horizon (NYSE:FHN) about three and a half years ago and again a year ago, and though the stock has lagged Regions Financial (NYSE:RF) and SunTrust (NYSE:STI)
since October of 2011, it has been a relative outperformer over the
last year. First Horizon continues to make credible progress on running
off its non-strategic loan book and reducing operating expenses while
also slowly moving back to a growth footing.

The odds may still
favor First Horizon becoming an acquisition target in a few years, but
in the here and now, the company still has significant scope to improve
its efficiency ratio and perhaps take advantage of higher rates. I think
First Horizon is more or less fairly valued now, but I still see
opportunities for the bank to outperform and start earning a bigger
benefit of the doubt in analyst models.

Wall Street may not be a zero-sum game at all times, but I think it
happens often enough to say that bad news in one spot is usually good
news somewhere else. I'm not remotely happy that oil's freefall has
created a crater in the energy portion of my portfolio, but that drop
has taken down the shares of many Texas banks, including Prosperity Bancshares (NYSE:PB).

While
an ongoing energy rout would eventually damage Prosperity's loan growth
and credit quality, direct energy lending is less than 10% of the loan
book and Prosperity has exceptionally clean credit metrics. I would
expect Prosperity to return to its M&A ways at some point this year
and although not a screaming bargain by conventional metrics, the value
in these shares is getting interesting.

Altera (NASDAQ:ALTR)
shares have gone nowhere fast. After a run that saw the shares double
from May of 2010 to May of 2011, the shares have spent most of the
following four years chopping around between $30 and $40. It hasn't
really gone all that much better for Altera's chief rival, Xilinx (NASDAQ:XLNX), either - the shares haven't shown the same choppiness, but the five-year returns are almost identical.

I liked the shares around $34 back in June of 2014
and they did reach $38 before disappointing guidance and growing
concerns about the health of the telecom/wireless business sent them
back below the $35 midline. While I do think the shares are undervalued
today, investors need to appreciate that the competitive dance with
Xilinx is unlikely to ever result in a clear winner and that new
entrants into the market could eventually chip away at market share and
margins. I still like Altera relative to a lot of the analog players,
but the stock likely needs the company to post strong margins in the
second half of 2015 and no further pushouts of the 14nm plans to break
out above the high $30's.

Six months ago, I thought the Street had overreacted to disappointing results at Maxim Integrated Products (NASDAQ:MXIM)
to such an extent that the stock looked like a good relative value in
the space. Since then, the shares have done pretty well relative to its
peer group - up about 15% while Linear (NASDAQ:LLTC) and Analog Devices (NASDAQ:ADI) were up in the single-digits and a stock I liked better, ON Semiconductor (NASDAQ:ONNN) rose about 16%.

Maxim is still facing the same basic set of challenges - finding new sources of growth now that Samsung
is no longer likely to be a significant growth driver in the coming
years. Maxim is saying and doing some of the right things, including
getting out of low-margin businesses like consumer MEMS and touch and
focusing on higher-growth opportunities in industrial and auto, but I'm
concerned about the company's ability to truly differentiate itself.
With the valuation looking pretty fair today, I don't dislike the stock
but can't work up a lot of excitement to buy in today.

Monday, January 26, 2015

With the exception of a run in the first quarter of 2014, the space between mid-2013 and mid-2014 was a dead zone for Intuitive Surgical (NASDAQ:ISRG)
shares as it became clear that growth at this traditionally high-growth
med-tech was slowing. System placements declined sequentially for five
of six quarters starting in the first quarter of 2013 and procedure
growth slowed as the medical community became less aggressive with
prostatectomy procedures and daVinci penetration topped out.

Sentiment
has been improving since mid-2014, though, helped by growing
penetration in general surgery and optimism that the new Xi and Sp
platforms and greater overseas sales efforts will reignite system
placements on an extended basis. Although Intuitive will likely start
seeing real competition relatively soon, this remains a pretty special
company within the med-tech space. The trouble is how much to pay for
those special qualities, as the Street is already back to expecting
quite a lot of growth from this company.

Sunday, January 25, 2015

Last year was a
lousy year for a lousy reason … and that reason is part of why it
took me almost four weeks into this month to get this post written.
My wife/partner of 22 years was diagnosed with advanced cancer in
2014 and suffice it to say that helping and supporting her took
precedence for the last third of the year as she went through
surgery, radiation, and chemo. For the last three months of the year,
I wrote fewer pieces in each month than I typically do in two or
three days, so you can imagine how much time I was spending paying
close attention to the markets.

Anyways, on with
the show...

I maintain two
separate portfolios (“A” and “B”). Portfolio A is supposed to
be a more actively managed portfolio with a greater focus on
year-to-year returns. Portfolio B is supposed to be more about
long-term opportunities; I don't care so much about the year-to-year
performance of holdings so much as the potential/performance over
three or more years.

Portfolio
A did okay in 2014, beating the S&P 500 and Russell 3000 but
lagging the Nasdaq. The biggest positive contributors were Alnylam
(ALNY) and Neurocrine Biosciences
(NBIX), followed by Multi-Color
(LABL). Hurco (HURC)
and the Wright Medical Group CVRs
(WMGIZ) both did well but make up a relatively small part of the
assets. ABB (ABB),
First Cash Financial (FCFS) and
FEMSA (FMX) were the
biggest drags on performance; Cameron
(CAM), Lundbeck
(HLUYY), Weatherford
(WFT), and Ultratech
(UTEK) were all laggards, but less meaningful given their smaller
allocation.

Portfolio
B was a total mess, lagging all of the indexes I care about and doing
just generally rotten on its own. I suppose I could blame some of it
on a lack of attention in the last third of the year, but the numbers
are what they are. Alnylam, Broadcom
(BRCM), and EMC (EMC)
were the most meaningful positive contributors, while Statoil
(STO), Triangle Petroleum
(TPLM), and FEMSA were the biggest losers in the mix.

On a combined
basis, the results weren't nearly good enough. The three-year and
five-year numbers are still decent, but hopefully I can get back to
the sort of performance I expect on a year-in/year-out basis.

UnitedHealth (NYSE:UNH)
is the biggest player in managed care and, in my opinion, the best-run.
Management has not only established a long history of "under-promise,
over-deliver", but has built up a strong technology infrastructure that
allows the company to price risk better, coordinate care more
efficiently, and drive consumer behavior. Optum remains a real growth
opportunity, as does international expansion.

The entire managed care space had a pretty good 2014, with stocks like Anthem (NYSE:ANTM) up more than 60%, Humana (NYSE:HUM) up nearly 60%, and Health Net (NYSE:HNT)
up 65%. Only in that context is UnitedHealth's 50% appreciation over
the past year something that might rankle investors. Health care, and by
extension managed care, is likely to remain a controversial political
topic in the years to come and UnitedHealth isn't particularly cheap
right now, but I wouldn't be in a big rush to sell.

This is starting to shape up as a disappointing quarter for semiconductor companies (Maxim (NASDAQ:MXIM), Linear (NASDAQ:LLTC), and Skyworks (NASDAQ:SWKS) not withstanding), so I suppose that ought to temper some of the disappointment with Microsemi's (NASDAQ:MSCC)
in-line December quarter and soft guidance for the next quarter. On a
more positive note, management is starting to see restructuring/cost
reduction efforts pay off in margin leverage and the company's
book-to-bill remains above 1.0x.

I continue to believe that
Microsemi remains overlooked and undervalued. The company is looking to
farm its legacy discrete business for margins and cash flow, while
driving growth from newer businesses like timing and FPGA where the
company's addressable markets and market share appear to be growing. I
continue to believe that fair value on Microsemi shares lies above $30
and that they remain a good buy within the chip space.

I've said before that North Carolina-based super-regional bank BB&T (NYSE:BBT)
seems to have a knack for moving against the tides in banking. When
other banks are reporting good quarters, BB&T disappoints and when
its super-regional peers report lackluster quarters it seems to do
better. So I suppose it shouldn't really be a surprise that BB&T
offered up a pretty solid set of results in a reporting season where
most of its peers haven't impressed the Street.

BB&T isn't
particularly asset-sensitive and it looks like next year will be another
"muddle through" unless/until rates start moving up. Management is
going to be busy, though, as it has three significant acquisitions to
integrate, including the largest acquisition announced/attempted since
the new regulatory system was put in place.

BB&T shares still
look undervalued to me and the bank still has the capacity to do
additional deals and increase its exposure to commercial lending.

I've seen a quote attributed to Warren Buffett that goes "price is what you pay and value is what you get". With that in mind, Fifth Third (NASDAQ:FITB)
does indeed look undervalued today but there are reasons why the stock
has been weak over the last year (down almost 18%) and a real laggard
next to peers like U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), and Huntington Bancshares (NASDAQ:HBAN).

From
the sounds of it, 2015 is going to be a challenging year for Fifth
Third. Management's loan growth guidance doesn't compare well to what
other banks in overlapping regions are seeing and the wind down of a
consumer advance product is going to create a significant headwind.
Amidst all that, management is not looking for any positive operating
leverage.

Why be positive? A bad year (or two) doesn't make a bad
bank and Fifth Third shares are priced for virtually no improvement in
ROE over the coming years. Fifth Third has a good collection of
fee-generating operations and relatively good exposure to growing
banking markets. Fifth Third isn't going to appeal to investors that
prize quality in banking stocks, but there is enough upside here to make
a closer look worth the effort.

Exciting is usually a bad thing in banking, and U.S. Bancorp (NYSE:USB)
makes steady high-quality execution look pretty good. Not surprisingly,
U.S. Bancorp isn't particularly levered to a quick turnaround in
interest rates and management is not going to compromise underwriting
discipline just to boost loan growth.

That said, U.S. Bancorp
maintains one of the best net interest margins of its peer group, has
kept pace with loan growth, is far more efficient with expenses, and has
several lucrative fee-generating businesses. U.S. Bancorp looks as
though it's priced only a bit below fair value, but that should be
enough for long-term investors who want a cornerstone holding in
financial services.

I liked F5 (NASDAQ:FFIV) back in September,
but had some concerns about the valuation and the company's history of
volatility around earnings. While the shares of this technology company
did rise in the months after that piece (topping out at an 8% gain), the
volatility I mentioned as a big concern has returned with a vengeance
after the company's fiscal first quarter report.

There have been
longstanding concerns about F5's ability to offset slowing growth in the
legacy ADC market with a host of product enhancements (especially
security) and the weakness in this quarter and guidance has given them
new life. I'm still a long-term bull on F5, though, and I think this
might be one of those "buy the dip" opportunities for adventurous
investors who can handle the risk that additional weakness in product
revenue pushes the shares down even further as the year develops.

Thursday, January 22, 2015

I liked PNC Financial (NYSE:PNC) about six months ago
and while the banking sector hasn't performed well since that time, PNC
has shown better relative performance - PNC shares have dropped about
3% and lagged Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC), while U.S. Bancorp (NYSE:USB), Fifth Third Bancorp (NASDAQ:FITB), BB&T Corp. (NYSE:BBT), and KeyCorp (NYSE:KEY)
have declined 4% to 15%. Nothing has really gone wrong with PNC
Financial per se since last summer, but with pretty scant prospects for
the much-needed rise in rates that would spur the sector, investors have
turned their attention to more promising sectors.

I still like
PNC Financial, but I'm not going to argue that anybody has to own a bank
stock. PNC doesn't offer the kind of leverage to higher rates that
Wells Fargo or Bank of America offer, but this is a pretty solid,
conservatively run bank that is focusing on sustainable loan growth,
improving fee businesses, and operating expense control. The near-term
upside for PNC isn't spectacular, but it remains a solid stock to
consider for investors looking for a long-term holding in the banking
sector.

The health care sector has staged a strong multiyear recovery, and Johnson & Johnson (NYSE:JNJ)
has more than just gone along for the ride. Although the company has
had to deal with major recalls in the consumer business and unimpressive
growth in the device business, the pharmaceutical business has emerged
as a real star with six blockbusters introduced in the last five years.

Nothing
lasts forever, though, and 2015 is shaping up as a more challenging
year. Headwinds in the pharmaceutical business appear to be coinciding
with forex-related pressure and the device business is unlikely to
accelerate enough to make up the difference. None of this makes Johnson
& Johnson a bad company, though, and investors may want to keep an
eye on these shares for the opportunity to pick up a potential long-term
holding at an attractive price.

If you want a good growth story in banking, you're going to have to pay for it. Like Bank of the Ozarks (NASDAQ:OZRK), PrivateBancorp (NASDAQ:PVTB)
is showing uncommonly good loan growth and has a large addressable
opportunity supporting many years of growth. But like Bank of the
Ozarks, that growth potential doesn't come with a bargain price.

I
like PrivateBancorp's leverage to higher rates and its leverage to
economically sensitive loan growth. I also think that the company has
made excellent progress in working off legacy assets and fundamentally
altering its business mix. If you want a bargain in banking, you're
going to have to shop amongst banks well off the beaten path or with
significant ongoing concerns/risks regarding asset growth, expense
leverage, and regulatory/legal issues (names like Citigroup (NYSE:C) and Bank of America (NYSE:BAC)
come to mind). PrivateBancorp doesn't look like a bargain, but if you
want to ride along with a rate-sensitive growth story, there may be
something here for you.

Wednesday, January 21, 2015

In prior articles on Amicus Therapeutics (NASDAQ:FOLD) I spoke of the significant value creation potential of successful clinical trials. If Amicus could show investors
that its lead drug migalastat was both safe and effective as a
treatment for Fabry disease, the market would reward the company with a
substantially higher valuation.

That has happened. Data from the
'012 study and additional extension data from the '011 study have
established that migalastat offers comparable efficacy to enzyme
replacement therapy (or ERT) and meaningful benefits to cardiac and
renal function. While the path to FDA approval is still a little murky,
investors should have more information relatively soon and I believe the
odds now favor approval and commercial success - at least in a subset
of patients with amenable mutations. Migalastat's future as a part of
combo therapy is still uncertain, but offers further upside, as do
clinical programs in Pompe's disease and MPS-1.

Amicus
Therapeutics has risen more than 160% over the past year, but still
looks undervalued on the basis of its market potential in Fabry disease.
With a more convenient administration (it's an oral medication) and a
potential safety benefit, there could be still more upside from pricing
and/or market share. Value creation through de-risking the Pompe and
MPS-1 programs is certainly still possible (positive data will support
higher odds of regulatory/commercial success), but those events are
further off.

Biotech investors can typically process positive and negative
clinical trial results, but when the data are mixed and/or there are no
simple conclusions it becomes more difficult to price the risk. I
believe that is at least part of what's going on with Conatus Pharmaceuticals (NASDAQ:CNAT)
in the wake of its confusing, and ultimately disappointing, Phase II
trial data on emricasan in acute-on-chronic liver failure (or ACLF).

I
think it's too early to say that emricasan is an ineffective drug and
unworthy of further clinical development. The highest dose of the drug
did suggest a benefit and it is worth the company's time to further
refine the dosing and trial design. Unfortunately, the issues with trial
enrollment and completion raise pertinent questions about the
difficulty of future ACLF studies and whether management can find a
clinical pathway to get this drug to market.

The long road back for the U.S. money-center banks hasn't flattened out a bit. Absent higher rates, Bank Of America (NYSE:BAC)
is going to have its work cut out growing net assets as it works down
its run-off portfolio, but core expenses are coming down and if those
rates to move up this bank should be ready. Declining litigation risk
ought to help sentiment and economic growth should be good for loan
growth, but I do have some concerns that trimming expenses could make
the bank more vulnerable to market share losses to harder-charging
rivals.

Bank of America was one of the stronger performers among
the large banks over the past year but there's still enough potential
here to merit a closer look, particularly for investors who believe that
interest rates will rise higher and/or faster than the Street expects.

Tuesday, January 20, 2015

I haven't always been Citigroup's (NYSE:C)
biggest fan, as I thought investors had gotten a little carried away
with the stock. With the shares down 9% over the past year (although up
more than 3% for 2014), Citi has emerged as a relative laggard among the
big banks. At the same time, there has been ongoing improvement in the
underlying fundamentals and I think the dichotomy between price and
value now favors a more bullish slant on the shares.

For an investor who sees himself as more value-oriented than growth-oriented, Middleby (NASDAQ:MIDD)
is always challenging and frustrating. Built largely through
acquisitions, the company has nevertheless posted revenue growth in the
vicinity of 20% a year (annualized) over the past decade, with a
doubling of FCF margins supporting even better FCF growth. What's more,
it arguably doesn't get enough credit for growing and improving those
assets it acquires.

Middleby remains a stretch from a DCF
valuation perspective, or at least unless you're willing to assume
double-digit revenue growth and FCF productivity well above the norms of
the industry. That said, the price isn't so unreasonable from an
EV/EBITDA standpoint, and the company is working on commercializing
several concepts with significant revenue and margin potential.

Even allowing for the fact that growth becomes more difficult as a company get bigger, if Bank of the Ozarks (NASDAQ:OZRK)
continues to execute like this it is not going to be a small bank for
long. This Arkansas-bank remains heavily weighted to real estate-based
commercial lending, but continues to use disciplined underwriting to
control risk while leveraging a very low-cost deposit base. The shares
don't look cheap by most of the bank valuation metrics I like, but
quality growth doesn't come cheap and I still see opportunities for
outperformance and value-building acquisitions.

Friday, January 16, 2015

Emerging med-tech Novadaq Technologies (NASDAQ:NVDQ) is now entering a new phase of its corporate life. The soured relationship with LifeCell
is now in the company's past, and Novadaq is moving forward with a
suite of products that offered demonstrated clinical benefits.
Transitioning back from LifeCell is going to have a near-term impact on
sales, though, and not for the good. Longer-term, I continue to believe
that Novadaq can generate more than $1 billion in annual revenue with a
portfolio of products that drive better outcomes in open surgery,
minimally invasive surgery, and wound care.

The outlook for the construction and mining industries hasn't gotten much better, and with that both Caterpillar (NYSE:CAT) and Komatsu (OTCPK:KMTUY)
have posted pretty uninspiring performances. While the environment for
mining equipment is still under pressure from weak prices and shrinking
capex budgets, and the construction market in key Komatsu markets like
China and Japan is hardly great, Komatsu is investing in long-term
innovation, maintaining a focus on margins, and positioning itself for
the eventual recovery.

Since my last piece on Komtasu, these shares have outperformed Caterpillar, Joy Global (NYSE:JOY) and Terex (NYSE:TEX)
by a pretty healthy margin. Although Komatsu isn't particularly
well-positioned for a construction recovery in North America (or
Europe), a turnaround in the emerging markets would be a different
story. I don't think investors need to rush to buy this stock, but the
valuation isn't too bad and I think the company's emphasis on its more
lucrative parts/service operations and long-term innovation could pay
dividends down the road.

Wells Fargo (NYSE:WFC)
was the best performer of the seven largest U.S. banks last year, and
it's hard to argue that the bank didn't earn that Wall Street love. The
earnings quality here is relatively high, the net interest margin is
solid, and loan growth has been pretty good. Add in solid returns on
capital and Wells Fargo is definitely a solid bank.

The only real
nit for me to pick is valuation. I think Wells Fargo still has a good
opportunity to cross-sell more products to its retail and commercial
customers, grow loans at a rate greater than GDP, and bolster businesses
like cards and asset management. With its returns on capital supporting
a fair value range between $51 and $54, though, I'm not so sure of
Wells Fargo's ability to maintain that peer-beating stock market
performance.

Development-stage med-tech Sunshine Heart (NASDAQ:SSH)
has had a good run up from its mid-December lows, and the company
continues to move forward with the clinical development of a
device-based approach for congestive heart failure that could mark a
real improvement in quality of care. That said, the company continues to
see frustratingly slow enrollment and pushback on reimbursement.

Unfortunately,
there don't appear to be easy solutions to Sunshine Heart's primary
problem - it lacks the resources of major cardiology companies like Boston Scientific (NYSE:BSX), Medtronic (NYSE:MDT), or St. Jude Medical (NYSE:STJ)
that could otherwise support and encourage enrollment. Getting the
FDA's permission to run an interim analysis would certainly help, and
the shares do appear undervalued, but the company is climbing a steep
hill and investors shouldn't kid themselves into thinking that the need
for a better treatment for heart failure and the apparent efficacy of
Sunshine's C-Pulse system will, on their own, ensure a successful
outcome.

Six months have passed since my last article and not too much has changed for Linear Technology (NASDAQ:LLTC)
on a fundamental basis. The company still has some exciting
opportunities in the industrial and automotive verticals, but is also
facing serious competition from Texas Instruments (NASDAQ:TXN) and Analog Devices (NASDAQ:ADI) (among many others) and widespread doubts that the company can take industry-leading margins much higher.

I
thought Linear was more or less fairly valued six months ago (the
shares are up 2% since) and that is still my opinion. Improving growth
in the U.S., particularly in the industrial vertical, ought to help but
probably not enough to radically alter sentiment. The company does have a
large amount of cash, though, so additional capital returns to
shareholders and/or acquisitions cannot be ruled out.

Uninspiring core profits (usually referred to as pre-provision operating profit) has become a theme for JPMorgan Chase (NYSE:JPM),
and once again, this giant U.S. bank delivered a result that was shy of
analyst and investor expectations. Add in some concerns about
potentially higher capital requirements and a 10-year interest rate back
below 2%, and I don't blame investors for selling this bank.

That
said, I am still holding on to these shares, and I continue to believe
that the Street underestimates the core earnings potential of this bank.
JPMorgan is definitely levered to higher interest rates, but management
has its own internal levers to pull as well - particularly where it
concerns ongoing expense reductions and growing its commercial bank
operations. With the shares looking 15% to 20% undervalued, I continue
to believe JPMorgan is one of the better alpha opportunities among the
large banks.

Small-cap cardiology med-tech AtriCure (NASDAQ:ATRC) did see its stock price momentum slow down from the 100%-plus pace between two of my prior pieces,
but the better than 20% rise since late April of 2014 still isn't bad
at all. This growth isn't just about the Street turning up a previously
overlooked name; the company is delivering good beat-and-raise quarters
and posting the sort of revenue growth that growth investors like to see
from med-techs.

It looks as though growth is going to slow in the
next year due to currency movements, but the underlying growth story at
AtriCure remains intact. The company remains the only company with
FDA-approved surgical ablation products and surgical ablation remain an
underpenetrated option for treating a-fib and reducing stroke risk. Add
in the potential of the AtriClip as another option in reducing stroke
risk and management may not be overstating an annual blue-sky potential
market of $1 billion a year. Against a market cap of less than $600
million, that argues that AtriCure's shares still have more to offer.

Receptos (NASDAQ:RCPT) has come along quite nicely since I first wrote about it as a Top Idea in August of 2013.
The shares' 150%-plus move has been fueled by strong clinical data, as
lead drug RPC1063 ('1063) has shown solid efficacy and cleaner safety in
relapsing multiple sclerosis and very encouraging data in ulcerative
colitis. The latter has created a very real possibility that '1063 could
be a multi-indication blockbuster, as an effective oral therapy for
ulcerative colitis and Crohn's disease could be a real blockbuster.

Investors
may feel a little starved for big catalysts in 2015. The Phase III
RADIANCE and SUNBEAM studies in MS won't have data to show until 2017
and the expectations are already high for the company's expected release
of 32-week data from the Phase II ulcerative colitis study. That said,
the company may put a new diabetes drug into human studies in 2015 and
the company has made no secret that it intends to find a partner for
'1063.

These shares aren't nearly the bargain they once were, but
there is still significant potential value locked in the MS, UC, and
Crohn's programs. It is going to take time to produce the clinical data
that it will take to unlock that value, but I'd be in no rush to sell
these shares and I would consider them if this recent sell-off
continues.

Wednesday, January 14, 2015

Nine months ago, I thought XenoPort (NASDAQ:XNPT) had some appeal for very aggressive investors
willing to play the odds that not only would the biotech sector
recover, but that the Street would get more bullish on XenoPort's
relaunch of Horizant and the prospects of XP23829 ('829) in multiple
sclerosis and possibly psoriasis as well. Since then, the shares have
risen almost 120%.

Is there still enough upside in XenoPort to
make it worth holding these shares? The answer is a guarded "yes". The
markets for both psoriasis and multiple sclerosis are each likely to be
worth more than $15 billion a year by the time '829 achieves commercial
sales, but the company is still facing comparatively long odds for
commercial success. That makes the Phase II psoriasis data later this
year very significant - a strong indication of efficacy should unlock
significant value (by de-risking the outlook), but inadequate results
will sap virtually all of the upside.

Enthusiasm for immuno-oncology hasn't waned, and why should it? Companies like Bristol-Myers (NYSE:BMY), Merck (NYSE:MRK), and Roche (OTCQX:RHHBY)
have been producing clinical data from immuno-oncology drug trials
showing real improvements in response rates and survival in a range of
hard-to-treat cancer types. Although Celldex (NASDAQ:CLDX)
doesn't have the flavor-of-the-moment focus on CAR-T therapies, I would
argue that the company's collection of vaccines, ADCs, and targeted
antibodies is well worth a closer look from biotech investors.

"I guess what I'm trying to say is, if I can change, and you can change, everybody can change." Rocky IV

That is probably the first time I've quoted Rocky Balboa in an investment article, but in the case of Alcoa (NYSE:AA)
it fits. A year and a half ago, you wouldn't have found many analysts
who gave Alcoa much of a chance to meaningfully restructure and improve
its business, even though management was already well underway with cost
and productivity initiatives.

And yet here we are - Alcoa's
shares are about 60% over the past year, 80% over the past two years.
While 2014 revenue was only about 14% higher than the 2010 level, total
segment ATOI was more than 40% higher, as the company has made real
strides with cost reduction and a mix shift toward higher-value
products.

Tuesday, January 13, 2015

Investors haven't been all that enthusiastic about Wright Medical (NASDAQ:WMGI) since its late October announcement of a merger with Tornier (NASDAQ:TRNX)
and an approval letter from the FDA for its Augment biological product.
The shares have fallen almost 20% since then, as I would imagine some
investors who had held Wright Medical in anticipation of a favorable
Augment outcome and/or a bid from a larger med-tech company might have
decided to call it a day.

To be sure, Wright Medical's management
is putting a lot on its plate. Integrating the two businesses is going
to take quite a bit of energy and launching Augment will demand a high
level of sales execution - it has all the hallmarks of a great product,
but it won't sell itself. If Wright Medical can successfully meld the
two businesses, deliver on the multi-hundred million dollar promise of
Augment, and drive greater leverage in manufacturing, sales, and
distribution, a fair value above $40 is possible. If management
stumbles, or if the extremities market slows, the market will not be
forgiving.

The past year was a miserable one for Ultratech (NASDAQ:UTEK)
shareholders. The recurrent theme of the year was that weak 14nm/16nm
yields weighed on orders for new LSA tools, leading to multiples "shifts
to the right" in order and revenue expectations. Expectations for 2014
revenue fell from the range of $180 million to $200 million in late 2013
to $147 million as of this writing and now there is concern as to
whether Ultratech has lost share to Screen Holdings (OTC:DINRY) and Mattson (NASDAQ:MTSN) and whether 10nm might sap the 14nm/16nm cycle altogether.

This
certainly showed up in the stock's performance. Ultratech fell 37% last
year, while Mattson rose more than 19% and Screen rose almost 13% (Applied Materials (NASDAQ:AMAT),
which also sells thermal processing equipment rose more than 36%). It's
not hopeless at Ultratech, and the company does have growth
opportunities in advanced packaging, metrology, and atomic layer
deposition, but 2015 is likely to be a long year for shareholders
without some visibility and encouragement in LSA orders.

Given the importance of scale and exposure to emerging market growth
for global consumer businesses, it seems like a "when, not if" type of
question regarding SABMiller's (OTCPK:SBMRY)
future involvement in M&A. The key question, though, is whether
SABMiller continues to play the role of acquirer and consolidator, or
whether the company (likely grudgingly) finds itself scooped up.

Arguably
SABMiller doesn't need to concern itself overly much with M&A. The
company generates 70% of its profits from emerging markets, the highest
such percentage among the major brewers, and is weighed to the lowest
per-capita consumption markets (meaning that it can expect to benefit
from rising incomes/consumption). Not only that, SABMiller is one of the
largest Coca-Cola (NYSE:KO) bottlers and stands to benefit from a new JV in Africa as well as further potential expansion.

With
M&A likely to factor heavily in the company's future, a stand-alone
valuation may be beside the point. That said, mid-single digit revenue
growth and further incremental FCF margin potential do support the stock
at this level, with M&A potentially adding revenue (if SABMiller
buys) or margin synergy (if SABMiller is a seller) to the valuation.

The best tonic for a robust stock valuation is ongoing financial outperformance, and Global Payments (NYSE:GPN)
has been delivering that over the past three quarters. Not only is
Global Payments continuing to benefit from strong businesses in markets
like Spain, but the company's direct efforts are offsetting the
lower-margin ISO channel and management seems to be doing a good job of
integrating and leveraging acquisitions.

I like the prospects for
Global Payments to improve its margins in the coming years through more
ex-US growth and the expansion of the higher-margin integrated payments
business. I also believe there are several markets that the company
could seek to enter by way of M&A that would also boost the
sustainable growth rate. The only problem is that a lot of this seems to
be worked into the stock price. I wouldn't argue against the idea that
ongoing outperformance could continue to boost the shares from here, but
I'd much rather buy on a dip if that were possible.

Sunday, January 11, 2015

My wife is doing well with her therapy. She finished the radiation portion of her clinical trial a little while ago and has her last chemo infusion in about 10 days. The side-effects have been quite mild (at least relative to our expectations), but they could still flare up after the next infusion.

In the meantime, her PT is going reasonably well. Her lymphedema has been under good control (less than 2% in the arm) and her range of motion is quite good.

After the last treatment it'll shift to the "watchful waiting" portion ... a part that I suspect may be quite challenging in its own right (the "doing something" aspect of radiation and chemo offers its own type of comfort).

Investors continue to fret about the health of the manufacturing sector in the U.S. and Germany, but Hurco (NASDAQ:HURC)
continues to follow its own successful path. This small manufacturer of
precision machine tools has delivered another solid quarter, lifting
its full-year revenue growth back into the mid-teens and starting off
the next fiscal year with a good order book and margin strength.

Looking
ahead, there are still solid reasons to be bullish. The company's
efforts in additive manufacturing / 3D printing aren't likely to make a
significant difference in the near term, but the introduction of new
control technology very well might. Hurco is small enough that it can
move independently of the larger machine tool industry, but if
manufacturing activity in Germany and U.S. can expand in 2015 Hurco
ought to do well.

What AngioDynamics (NASDAQ:ANGO) does is not easy. This small med-tech company competes with huge players like Bard (NYSE:BCR) and Covidien (NYSE:COV) (as well as Teleflex (NYSE:TFX))
in markets that are not growing all that fast and where a large
sales/marketing effort and the ability to bundle can make a significant
difference in closing sales. AngioDynamics hasn't always helped their
own cause either, with issues in manufacturing, quality control
(including a recent FDA Warning Letter), and financial reporting.

The
company is making progress, though, and seems to be nearing a point
where margins and profits could grow disproportionately to incremental
revenue growth. The company has also managed to add several products to
its portfolio that offer real benefits to health care professionals (and
savings to the facilities) and their patients. I'm not so crazy about
the valuation here, but if management could push revenue growth above 5%
the shares could still do rather well.

Investors have unquestionably grown more and more concerned about the
ag sector over the past 12 months. Corn and soybean prices have
rebounded from the end of September, but soy prices in particular are
well below the year-ago levels. With less profitable insurance levels
likely for 2015, planted acres may well come under pressure and some
farmers may be tempted to skimp on seed traits as a way of saving money.

That's not a great backdrop for Monsanto (NYSE:MON), but I continue to believe that Monsanto will be hurt less than rivals like DuPont (NYSE:DD) and Syngenta (NYSE:SYT). Increasing competition is a risk, as the Chinese have approved traits from Syngenta, Bayer, and Dow's (NYSE:DOW) delayed launch of Enlist will most likely eventually become a full launch (albeit not until 2016).

What
Monsanto continues to have in its favor is a meaningful yield advantage
that supports its value proposition to farmers, not to mention a deep
pipeline of traits targeting disease resistance, yield enhancement, and
other productivity initiatives. Add in the potential of precision
ag/analytics, biologicals, and RNAI-based products, and there is still a
valid argument for Monsanto as a long-term holding even if the next
year or two are more challenging.

Friday, January 9, 2015

While a long-term bull on pan-African mobile phone services provider MTN Group (OTCPK:MTNOY), I was cool on the stock's near-term performance potential back in September.
Since then, the ADRs have dropped about 25% while the local shares have
fallen about 20%. That move hasn't occurred in a vacuum, with investors
worried about the macro outlook in Nigeria and South Africa and
company-specific concerns about MTN's performance in those large
markets.

I remain bullish and I think the shares are looking more
appealing on a short-term basis as well. I believe the market has
over-corrected for the risks in Nigeria and underestimates the steps
taken to improve results in South Africa and the long-term potential of
mobile money services. Adverse currency moves have pushed my target down
by about $1, but I think MTN Group remains a well-run play on growth in
Africa and to a lesser extent the Middle East.

Neurocrine Biosciences (NASDAQ:NBIX)
has a lot on the line in 2015, as the company will see pivotal data on
its two late-stage clinical compounds (Elagolix and NBI-98854, or '854)
and these reports will have significant impacts on the value of the
shares.

So far, so good. Neurocrine's partner AbbVie (NYSE:ABBV)
announced positive top-line data from the VIOLET PETAL Phase III study
of Elagolix in endometriosis on Thursday morning. While the release was
spartan and investors will have to wait until later in the year for more
details, the positive efficacy and consistent safety data nevertheless
do help de-risk the program for Neurocrine shareholders.

Although
Neurocrine shares don't look exceptionally cheap in the immediate
aftermath of this data release, the potential of further positive
releases can't be ignored. Should the pivotal study of '854 in tardive
dyskinesia succeed, another $5/share or more in value could be unlocked,
not to mention the potential value of clinical updates on Elagolix in
uterine fibroids, '854 in Tourette's, and NBI-77860 ('860) in congential
adrenal hyperplasia.

A couple of months ago, I expressed concerns over some potential red flags at industrial distributor MSC Industrial Direct (NYSE:MSM).
Those flags are starting to wave more prominently now, and it is quite
reasonable to ask whether management has a good enough plan in place to
drive real synergy from the CCSG transaction and continue to gain
profitable share in the industrial MRO market.

To be clear, I'm
not saying it's all over for MSC Industrial. There is still substantial
growth potential in its addressable market - from share gains and from
expansion into new verticals and new product categories - but prior
advantages like focuses on metalworking and e-commerce no longer serve
the company as well as they once did. Management has some clear
challenges in front of it; growth at CCSG must improve, synergies must
emerge, and margins must improve. With another disappointing outlook on
margins, though, investors can be forgiven if they opt for a "wait and
see" approach with these shares.

Wednesday, January 7, 2015

One of the most messed up stories in international telecom continues to be exactly that, as Turkcell (NYSE:TKC)
faces the operating challenges of fierce competition in the Turkish
mobile phone market and the behind the scenes dramas that continue to
delay an annual shareholder meeting and the declaration of long awaited
dividends. While I chose to hold on to the shares after my last update
and continue to believe that there are ways in which Turkcell can report
better performance in the coming years, it's hard to argue that this is
the name investors need to own in emerging markets.

I have long used a barbell investing strategy, where risky
investments (like biotech) are offset by more staid and predictable
holdings like 3M (NYSE:MMM).
Ideally high-quality mega-caps like 3M can be held for many, many years
at a stretch, allowing good management teams to generate substantial
returns from the businesses.

Almost all good things have to
eventually come to an end, though, and I can't in good conscience tell
anybody else that they should look to buy 3M today. Based upon the
company's recent financial performance and mid-December Investor Day I
still believe that this is a very high-quality, very well-run
industrial, but it is difficult to see how these shares are attractively
priced on their intrinsic merits.

PRA Group (NASDAQ:PRAA),
the receivables collection company once known as Portfolio Recovery
Associates, didn't have the best 2014 as concerns about revenue quality
and the company's ability to replenish its store of receivables weighed
on the shares after each earnings report. While the stock was in the
black for the year (and matched the S&P MidCap 400), it trailed the
S&P 500 and doesn't exactly trade at an undemanding valuation.

I'm
not bearish on PRA Group, but I do believe the company has to re-earn
its benefit of the doubt and there is less margin for error than in the
past. The expected return of major sellers of charged-off debt in 2015
would be a boon, but emerging guidelines for the industry are still
foggy. What's more, while the company has made strides with its
collections efficiency, it is an increasingly large fish in its pond and
may find its own size to be a formidable obstacle to maintaining
historical growth rates.

Infant products manufacturer Summer Infant (NASDAQ:SUMR)
spent most of 2014 getting its house back in order. The company exited
its low-margin licensing business, slashed its SKU count, restructured
its product development process, as well as its sales approach, and
reoriented the company around internally-driven sales and ROIC targets.

It
seems premature to say "job done", but the company has definitely
stabilized the business with a return to sales growth (high single-digit
to low double-digit on an adjusted basis) and improving gross margins.
Now it is time for management to show that it can gain share in
important categories like monitors and strollers and establish a
footprint in new retail channels. I'm bullish on management's plans and I
believe that 2015 should see progress on internal growth initiatives.
With a fair value target of almost $4 based on what I believe are
relatively conservative projections, there is still credible upside to
this consumer goods story.

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I started this blog as a way of archiving my writing for sites like Investopedia, as well as posting some thoughts on the markets, stocks, or whatever else strikes my fancy.
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You can reach me at tuonela (dot) fool (at) gmail (dot) com

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Information is taken from sources believed to be reliable but no warranty or guarantee is made with respect to accuracy.

Investing involves risk and requires proper due diligence. In no way should a reader should presume this blog represents personalized financial advice or is a substitute for proper due diligence. The author expects you to be enough of a grown-up to realize this.